Street Sense: The fundamentals of stock market investing
Value Investing Is Coming Back
With the economy slowing, investors are now seeking companies whose true worth hasn't been recognized.

Investment managers are generally divided into two distinct camps. On one side are those who are willing to pay a premium for shares of companies that have the potential to grow quickly. Their philosophical opposites are the managers who seek low-risk stocks that can be purchased at bargain prices.

Simply stated, these two groups represent the age-old investment argument pitting growth against value.

Through most of the 1990s, the growth players had the upper hand, as all types of unproven technology, biotechnology and Internet companies saw their stocks soar into the stratosphere based on nothing more than the hope that these companies had superior potential for future growth. When the growth boom collapsed in March of last year, stock investors finally began to return to the long-neglected value sector.

In this article, I'll explain the basics of value investing and tell you why value stocks can be a haven during periods of slowing economic growth.

FERRETING OUT BARGAIN STOCKS

Value investors essentially invest in companies that possess undervalued tangible or hidden assets whose true worth can be expected to eventually be reflected in the stock's market price.

Those who search for undervalued stocks are likely to primarily immerse themselves in the study and evaluation of individual companies. Just as the corporate takeover expert examines a company in detail to obtain an estimate of its overall worth, the stock market value player attempts to find stocks that have greater potential for gain than immediately meets the eye.

For example, some companies own real estate that's carried on the corporate books at many millions of dollars less than the property's current market value. Some paper and forest products firms own extensive timberland that's valued on the balance sheet at a fraction of its true worth. Motion picture and media companies often own vast film libraries and television syndication rights that have the potential to bring in a steady stream of income.

LOOK FOR REAL ASSETS

The value-conscious investor will usually avoid stocks of companies whose business is based purely on concepts or ideas, such as biotechnology companies, fledgling high-tech outfits and anything related to the Internet. Instead, the value player is looking for something more tangible. Perhaps an old-line manufacturing company with a new product, a sparkling balance sheet and an overf-unded pension plan. Maybe a company that holds a dominant position in a niche business, or that has well-known products that give the firm valuable marketing clout that can be used for future product introductions.

Attractive and exploitable assets can come in many forms. It's up to the canny value investor (or securities analyst) to discern the extra value that others fail to notice.

YOU'LL NEED TO BE PATIENT

Sometimes the value player has to wait for a catalyst that unlocks a company's true worth. ITT Corporation broke itself up into three separate companies because it feared that its low stock price presented too tempting a target to potential acquirers. News of the breakup sent the stock to new highs.

The "growth vs. value" debate goes on, but like the race between the tortoise and the hare, the slow, steady approach should win in the long run. 

Ophthalmology Management Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.